Friday Morning Briefing

Welcome to our morning briefing. Here we are reviewing short term setups ahead of the NYSE opening bell. If you are a scalper or swing trader then these setups may be of interest to you. As usual keep in mind that these are short term setups although they could be used as early entries for more longer term positions.

For some reason we’ve hit the motherlode on the setup front this morning – everything is coiled up and ready to rip. But careful – it’s quadruple witching Friday and that means you need to set your stops particularly generous today – add at least 25% to your common distance. But before we get to the goodies let’s talk about price action on the equities side. We’ve popped quite a bit higher and then pushed sideways all day with minimal participation (see the Zero indicator flat lining) in a common ramp & camp fashion. What does that mean and where do we go from here?

Well right away that is the wrong question. There is no ‘right’ or ‘wrong’ when it comes to inherently flawed mindsets related to trading. You simply trade according to what *at the current time* is the most probable outcome – and sometimes that includes both directions (I can literally see heads explode here right now).

Let me give you an example. I have a chart on which price has reached an important inflection point based on your ‘lens’ (it’s all mental models anyway). How about a 100-day SMA plus we throw in a 25-week SMA nearby for good measure. PLUS the daily Bollingers have compressed and I suspect a big move is coming. Now based on prior history price usually has either bounced back or breached and then pushed higher very rapidly. Both trades could be profitable so I would get positioned short first with a stop above that inflection point. I expect to be stopped out of course (you always do) and once that happens I flip positions to be long with a stop below what now is tentative support. May I get whipsawed once or twice? Sure – can happen but in this particular case it doesn’t matter to me as I expect increased volatility to make up for some of the early losses if they appear.

Does this example always work? Of course not – but it’s an adaptive approach that over the long term has a positive edge. Now note that I spent a maximum of 5 minutes looking at my charts as the TA should only occupy 20% of my trading day. The other 80% are 20% campaign management and finally the most important and largest aspect of trading: self management, which is 60% of trading.

Too many of you guys confuse swapping directional opinions with trading – to me it’s merely mental masturbation. If that offends your fragile egos then GOOD – you are way too comfortable with your entrenched approaches. Trading is all about persona development and if you get settled/comfortable in a path that answers easy answers then the market will hand out instant punishment. Which btw, is why I love the trading racket – unlike in politics, the law, or religion it is not up to interpretation or opinion. Your acceptance of reality has no bearing on its validity – if you’re positioned incorrectly you will lose. In essence your job as a trader is to manage loss as best as possible.

Now let’s talk about the chart above – let’s just look at the price action. After touching and successfully retesting the 100-hour SMA the SPX is now back at the upper 100-hour Bollinger which has nicely contained price action over the past weeks and months. We may get scenario A or we may get scenario B – each direction is completely plausible as price has not yet told us that it’s ready to turn. Going short here right now is tempting as we ‘have not breached the new highs’, right? Well, yes and wrong – the assumption is that breaching the new highs has any meaning whatsoever – I mean we could breach it and then fall back like a rock! Maybe – so let’s look at how price usually moves:

This is our daily volume profile chart on the E-Mini futures – all based on trading volume concentrations. When we touched that 100-hour on the SPX we were near a volume hole and as you can see the big move up (and the prior move down) was exploiting an ‘easy move range with plenty of participation. Where are we now? Near a veritable volume chasm and that means we should be prepared for a pull back – but we can’t just go short without evidence. If there isn’t any on the daily (i.e. as in right now) then we look at the hourly panels instead for patterns. So let’s do that!

And there we have two Net-Lines opening the door to both directions. We are also seeing a bit of BB compression and if you curious as to what that means then look no further than to what happened on the 18th around 15:00 EDT. So we could get a big move here shortly – if you manage to get positioned early on the hourly then you can build your position up as the tape continued to push your way. And that means you may get an early entry into what turns out to be a daily or even weekly campaign.

And that is how professional traders approach it – it’s imperative that you remain nimble and continue to assess what the tape is telling you. How does that compare with simply drawing a line and saying – I’ll go short here, no matter what because the tape ‘is supposed to fall from here?’

On to the setups – crude looking at a lot of resistance here and I’m short with a stop above the 100-hour SMA.

AUD/NZD – coiled up like a clock and I’m long with a stop below 1.077.

More charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don't waste time and sign up here. And if you are a Zero subscriber you get free access to all Gold posts, which gives you double the bang for your buck!

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Here’s a new service I dug up the other day – dukascopy has a lot of negligible content but if you’re an Forex trader (and most of us are) then the daily spread monitor is very good medicine. So if you see spreads you can drive your car through it may just be your broker ripping you off.

Be careful if you’re trading the CAD crosses around 8:30am EDT – event risk. See you guys later today.


Brett’s Forex Adventures

This is the first post in a new Evil Speculator category we titled ‘Retail Trader Tales’. Writing down your personal experience forces you to relive them and perhaps come to terms with some of the demons that may still plague your subconscious. If nothing else others may realize that they are not alone and that many retail traders out there have been taken advantage of by shysters, false gurus, lousy brokers, the list is long. If you feel like sharing your own (sad or success) story please send us an email to admin@ – of course your full name will not be mentioned and your dirty secrets are safe with us ;-)

My first foray into trading was back in 2009 when a work colleague introduced me to MT4 Expert Advisors (specifically MegaDroid).  I worked in corporate IT so the concept definitely struck a chord with me and before you knew it I had MT4 up and running, did a bunch of flawed backtests, ran a demo for about 3 days and then dropped it on a live account of $10k.  It was doing OK, but seemed to be losing as much as it was gaining, so I started hunting around for other EAs and deeper into the rabbit hole I went.  I wanted a healthy mix of EAs so that when one was losing the others would be gaining and I would have a perfectly smooth equity line.  I even coded a few of my own to add to my mix.  I was obviously very naïve back then but the most unfortunate thing is that it actually worked for some time rather than failing as fast as it should have.  This lead to me piling more money in (in a controlled fashion, every time I made 20%, I’d add another $10k to my account) and before I knew it I had dropped $50k in there and with a balance of around $80k thought I was a genius.  Obviously this merry little ride had to come to an end and when my account started to decline I didn’t want to believe that this wasn’t going to work (I had dreams of stopping work! I can’t let that go!).  I ultimately closed the account with $30k left in it.  $20k of mine down the drain.

In 2010 I came to the conclusion that EAs were not the panacea I had believed them to be and decided that manual trading was the only real way to make money, only humans could adapt to a changing market.  Having no experience myself I decided the best route was to go with a signal service.  I settled on a guy called William Deboeck who ran a service called WDFX.  Once again it unfortunately went extremely well… until it didn’t.  For 6 months it was profitable before its inevitable decline, and I bailed out after losing $10k of my own money.

So I can’t control what these guys are doing, I need to get into learning this stuff for myself so I can protect my own money.  In 2011 I signed up for a trading room run by a guy called Forexmeister who claimed he was an ex portfolio manager at some hedge fund.  Very few details other than that he would teach you to trade the way the hedge funds do it.  His strategy was basically to never let a trade lose, as it moved against you, you just averaged down because the market always turns.  When a trade has gone against you and you believe you are at an inflection point in the market, you open another trade in the same direction that will result in you breaking even when the new trade is 20 pips in profit.  There were calculators to help you work this out as part of the service.  Just so ridiculous looking back, I feel like an idiot even writing this!  Unsurprisingly (like all these basket style strategies) it worked well to begin with (you never lost) and I got more and more confident with the help of Forexmeister.  It did not help that he would constantly show off, dropping screenshots of his account balance and the profits from his individual trades into the traderoom (I was too inexperienced to consider this a red flag).  One night shortly after getting into a trade the market moved against me hard.  That’s ok, I’ve learnt how to deal with this, let it do its run and I’ll catch a retrace.  Retrace after retrace I bought more, bought more, bought more.  At 4am I eventually I closed the basket with a $20k loss.  One single basket.  I vomited from stress that same night and decided I was done with forex.  $20k of my own money gone.

Yet I continued to read and educate myself and after a reasonably lengthy hiatus from actually trading an account I came back in 2012 after stumbling across a guy called Scott Tuddenham.  He claimed to know how the big banks work and how to trade with them.  I read an interview of his in which he discussed privately training a small group of traders who were now all making money.  He did not run courses though.  I emailed him to ask if he would mind sharing some of his material and to my amazement he decided to take me on as a mentee (for a price) and teach me everything he knew.  I jumped at the chance.  I also decided this was my last crack at trading and that I was going to give it my all.  I quit my job (which I was angling to do anyway, I hated the place) and quickly opened another $10k account.  I spent about three months trying to learn his very vague system (just keep watching the tick chart, you’ll get a feel for when the big guys are moving then just jump in!) before dropping it.  I lost about $5k of my own money.

As this was coming to a close I was becoming dejected with the manipulated wild west of forex and was gaining rapid interest in futures.  I came across Premier Trading University and decided another opportunity to educate myself couldn’t be a bad thing (besides, I wasn’t ready to go back to work).  I actually don’t regret my time with PTU at all, a huge part of their focus was on trading psychology and discipline and I learnt a significant amount here.  My manual trading improved hugely.  I spent six months trading futures in their trade room and by the end I could calmly take every trade and enact every rule accurately and without worry.  I kept a trade journal, I wrote down my mistakes and by the end of those six months I was making almost no mistakes.  Unfortunately their system was quite hit and miss and even when trading in their live traderooms they were surprisingly bad at the discipline side themselves.  (Oh I was talking and missed that fast moving trade.)  Naturally it always seemed to work out quite nicely for them but my account never really hit the same returns as their claims.  I ultimately lost around $5k here, primarily in fees, my account ended up only slightly down.  At this point, the bigger sting was from paying bills and rent without a job so after 10 months off work I entered the corporate world once again.

Big surprise, still I couldn’t shake my love of trading (oh I’ll just read this new book, new website, new forum, whatever) and in 2013 I came across a service called Capital3X.  This was a signal service run by a guy called Mark who apparently was ex Goldman Sachs.  I had no interest in hurriedly jumping in again so sat on the sidelines and watched.  He made excellent returns (5-10% each month) for about 6 months before I decided to join.  As the fees were quite expensive I needed to open a $20k account in order to justify the service.  This amount of money made me nervous but I had been careful this time, I had been watching this guy for months and he was cautious and safe, right?  His success continued after I joined for about 3-4 months before the losing began.  Once again I didn’t let go, believing his constant promises that the market was going to turn and align with his bias like it had every time before.  It didn’t.  I lost the entire $20k.

My total loss from trading over the last 5 years?  $80,000.  I almost can’t believe that number, but there it is.  It’s not like it’s every penny I own, my job pays me well but that is still a huge amount of money for me.  That is essentially a house deposit.

I’m not sure what to take from the above.  If I read all that as a third party observer I would think the guy is an idiot.  Yet I am not a stupid person, I spent the majority of my university life doing every math subject I could get my hands on, I love math which I suspect is why I am so drawn to trading systems.  I am also a member of Mensa.  I’m sure it comes as no surprise then that hubris has been a large contributor to my failure (how could I fail at this?) and working on the psychology of trading has been one of the most important and one of the most humbling aspects for me.  That said, several times I have ‘quit’ yet still I come back.  (How’s that for a lack of discipline?)  I absolutely love trading though, the theory, the execution, everything about it.  In the last five years I have read countless books on all aspects of trading from Van Tharp to Mark Douglas and devoured them all.

I only came across Evil Speculator recently, at the time Scott’s second article on building a trading system was published.  There wasn’t really anything in there I hadn’t already come across in either the countless hours of study and research I had done or through my own experience but to see it all written down so succinctly and definitively was amazing.  I have read that series of articles several times over yet continue to resist the urge to do anything about it because I don’t want to get excited and commit more losses to this trading endeavor.

Am I an idiot for not pursuing these learnings from Evil Speculator and continuing to chase something I’m genuinely passionate about?  Or am I an idiot for considering jumping into another ‘new website’ which will ultimately lead to the same disappoint as all my other failed ventures?  I haven’t decided, all I know is that the dream of being able to make money doing something I actually enjoy is a difficult one to shake.

The Outer Limits

So where are back from whence we came and I hope you enjoyed the ride. I know – who am I kidding – it’s been a rough month and let’s hope that April will not only bring us better weather but also put us into a less devious market phase. So let’s see where we’re at on the equities side:

It’s getting interesting as we now have reached the outer limits of the current whipsaw zone. No, there is nothing wrong with your television set. Do not attempt to adjust the picture. We are controlling transmission. If we wish to make it louder, we will bring up the volume. If we wish to make it softer, we will tune it to a whisper. We will control the horizontal. We will control the vertical.

Literally that is – I’m not sure there is much left on the vertical but that was a nice jump in four days. If we push above 1880 then the momentum may again propel us higher in the stair step fashion we have have seen lately. Also don’t forget that SPX 1880 will switch our P&F back into bullish mode.

Also rather compelling right now is that the VIX is starting to drop below a pretty pronounced support line. And that may herald a new low volatility period that gets us back to the 12 mark or below. OR it may be that we are dropping from here. Unfortunately I don’t see a price pattern to get us into a position right now. At least on the equities side.

But that doesn’t mean we can’t have any fun, does it? Here’s crude which I very much liked this morning and happily pimped to my subscribers. I got filled short near 101 and it’s been one wild ride ever since. Have taken partial profits but will keep 50% in the running for a touch of daily support near 99.1. And if you weren’t a sub – well then you probably missed out ;-)

On a totally different note – you recall my write up on market phases the other day. Here’s a chart that should do two things for you – demonstrate two very distinct market periods for one. And then also drive home the point that mean reversion does not always happen, especially on the Forex and futures side. So if you trade expecting platykurtotic markets you will get burned, just a matter of time. Always know which market phase you are in and that also means looking at volatility. I and Scott have written about this rather exhaustively, go hunt it down – the search box is your friend.

We have a lot of setups tonight – here’s a freebie: Bond futures – the 10-year is at NLSL support but is also painting an RTV-S. I want to be short here with the trend if the NLSL triggers tomorrow.

Quite a bit more waiting below the fold – please join me in the lair:

More charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don't waste time and sign up here. And if you are a Zero subscriber you get free access to all Gold posts, which gives you double the bang for your buck!

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